In June, the Canadian government enacted a dreaded new law that will tax royalty trusts beginning in 2011. Despite strong opposition to the change from investors and the trusts themselves, the trusts have continued to execute their business plans. After all, they have four years until their tax-free window closes.

In July, two of the largest energy trusts closed on major transactions.

PrimeWest Energy Trust closed its acquisition of Shiningbank Energy Income Fund for C$1.25 billion, creating a trust with some 280 million barrels equivalent of proved and probable reserves, and 1.1 million net undeveloped acres in Alberta, British Columbia and the U.S. Williston Basin.

PrimeWest is now the fifth-largest energy trust by production volume and is expected to exit 2007 with daily output of some 59,000 barrels of oil equivalent (70% gas and net of planned assets sales).

Also in July, Pengrowth Energy Trust closed a number of financings to pay for its C$2.2-billion acquisition of Canadian properties from ConocoPhillips. It raised C$1 billion in equity in 90 days, and closed a US$400-million private placement of 6.35% notes in the U.S. due in 2017. They were unsecured and rank equally with Pengrowth's bank facilities and existing term notes. It also increased its syndicated bank credit facility to US$1.2 billion and extended the maturity date to June 16, 2010.

Pengrowth, one of the larger energy royalty trusts in North America, has a proved-plus-probable reserve life of approximately 10 years. Its reserve base was approximately 360 million barrels of oil equivalent at December 2006, pro forma for the ConocoPhillips deal now closed.

The trust has also reduced debt and focused its assets by selective sales of noncore assets this year, netting proceeds of C$283 million to date. Phase II of the disposition process is expected to close prior to year-end 2007.

Separately, Pengrowth announced in July that U.S. unit-holders are now eligible to participate in its Distribution Reinvestment and Trust Unit Purchase Plan (DRIP), which has been available to Canadian resident unit-holders since July 1992. Pengrowth has filed a registration statement and satisfied all other necessary regulatory requirements.

The enhanced DRIP permits unit-holders to elect to reinvest their cash distributions in additional trust units at a 5% discount to the weighted-average closing price of the trust units on the Toronto Stock Exchange for each of the 20 trading days immediately preceding the cash distribution date.

Additionally, unit-holders may opt to purchase additional trust units for cash of up to C$1,000 (US$900) per month under the same terms.

Analysts say that now, investing in the trusts should be based on individual trust performance and asset portfolio, as for any non-trust corporation.

In 2006, both the S&P/TSX Energy Index (of oil and gas companies traded on the Toronto Stock Exchange) and the S&P/TSX Energy Trust Index saw their worst performance since 1998. In light of that dismal record and the issues revolving around the new tax law, FirstEnergy Capital Corp. reported in April, "Our analysis continues to place greater emphasis on the comparability of results and valuations between the trust and corporate space.

"Specifically, the focus is on the fundamentals, namely, how well do these companies do at finding and producing oil and natural gas, with a secondary emphasis on the tax structure in which they operate." (For more on the energy landscape in Canada, see "Athabasca Attack" and a biannual Canadian M&A deal summary, as well as the special report, "The Canadian Oil and Gas Industry," in this issue.)

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